Tax policies

Domestic and foreign tax policies affect the incentive to engage in FDI and the means whereby it is financed.There are three channels through which tax policies affect the decisions taken by multinational firms.First, the tax treatment of income generated abroad has a direct effect on the net return on FDI.Second, the tax treatment of income generated at home affects the net profitability of domestic investment and the relative profitability of domestic and foreign investment.Third, tax policies affect the relative cost of capital of domestic and foreign investment.Thus, an increase in the domestic corporate tax rate leads to an increase in the outflow of FDI.